Retired Fannie Exec Dodges Fraud Claim

WASHINGTON (CN) – A class of Federal National Mortgage Association shareholders failed to prove that a retired senior executive with the government sponsored corporation committed securities fraud, a federal judge ruled. A class of Fannie Mae shareholders led by the Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio sued Fannie and three former senior executives, including Franklin Raines, in 2004, but U.S. District Judge Richard Leon granted Raines’ motion for summary judgment, ruling that the shareholders failed to link him to accounting irregularities that led to the largest corporate earnings restatement in U.S. history. “Sustaining claims for securities fraud requires a showing of scienter – either an intent to deceive or an extreme departure from the standard of ordinary care – for each individual or entity claimed to have committed such fraud,” explained Judge Leon. “Put simply, the securities fraud laws are not a means for shareholders to recover for all losses, no matter how sizable or sudden.” The judge found that the class “failed to put forth sufficient evidence from which a reasonable jury could find that Raines had such an intent.” The class action stems from an Office of Federal Housing Enterprise Oversight (OFHEO) investigation that accused Raines and his colleagues of knowingly or recklessly engaging in misconduct detrimental to Fannie Mae. In 2008, the D.C. Circuit ruled that the shareholders were unable to collect damages from the senior officers. The class claims specifically that Raines knowingly made false statements in the company’s periodic financial reporting about the soundness of Fannie Mae’s accounting and internal controls, and that he misled investors about his approval and participation in earnings management strategies designed to meet quarterly earnings-per-share targets to maximize bonuses. “Unfortunately for plaintiffs, they have not established a genuine issue of material fact as to Raines’ alleged scienter,” states the judge. “There is not only no direct evidence that Raines intended to deceive Fannie Mae’s investors, there is no evidence that he even knew his statements were false. Indeed, plaintiffs conceded these very points at oral arguments.”The judge granted Raines’ motion and dismissed him from the suit.